10 Steps to Outsourcing Success
A successful, offshore outsourcing strategy can provide benefits and cost-savings for your company — process improvements, expanded talent pools, cost containment, improved focus on core business, and reduced time-to-market to name a few. However, the inherent risks in an unsuccessful offshore project can compromise the anticipated benefits. How do you minimize those risks? First, don’t expect miracles at the beginning, and second, make an informed decision.
If your company is initiating an offshore strategy for the first time — or is looking for a better way to manage your existing offshore program — the following set of 10 steps will help you to minimize the risks and maximize the opportunities for outsourcing success.
1] Define clear objectives. A successful offshore outsourcing strategy begins with clearly defined objectives and measurable goals. Objectives state the reasons for an offshore program, illuminate its business value, and provide a working framework for making decisions about which vendor to work with, which outsourcing model to use, what projects to outsource, and what levels of risk to assume. Objectives also provide the context in which to evaluate how successful or unsuccessful your strategy is. Measurable goals are the events and functional metrics by which management can monitor progress, take corrective action, and project future performance.
A properly stated objective, for example, might be: Cap IT labor at $300 million while increasing productivity by 2 percent, or contribute to $10 million challenge by reducing targeted bill rates by 20 percent. The interesting thing about these objectives is that they are business objectives and don’t necessarily point to an offshore solution. Offshore outsourcing would be employed as the solution if it made the most sense in meeting these objectives.
The truth is, offshore ou
tsourcing is not the solution to every business problem or opportunity. Initiating an offshore strategy without carefully defined business objectives can lead to ambiguous or miscalculated management decisions, uncertain performance characteristics, and unrealized business value. In fact, an unfocused or mismanaged offshore outsourcing strategy can lead to higher IT costs, wasted resources, and lost business opportunities.
One measure of how prepared you are is to see how well you can represent your current baseline performance using the same metrics you plan to use to measure your future outsourcing performance. This baseline not only provides a point of reference for future measurement; it also clarifies which metrics are important in achieving specific goals and business objectives.
2] Set realistic expectations. After establishing your goals and objectives, you need to revisit them to make sure they’re realistic. Few companies have been able to hand over the keys to their IT department and walk away successfully. Replace those fabulous claims of saving 40 to 50 percent — even 60 percent — on IT labor costs by humbler projections of 15 to 30 percent, and then only after an initial startup period. Forty percent savings or greater have rarely been attained, and vendor selection costs, increased communications costs, redundant oversight, lessons learned, infrastructure, and a host of other “hidden” costs will minimize your first-year performance. This doesn’t mean your offshore program is unsuccessful. Rather, it means you need to consider this a long-term investment with considerable long-term benefits.
As teams mature, corporate culture acclimates to new business processes. As onshore/offshore management is streamlined, the benefits of a well-managed outsourcing strategy accrue. Unfortunately, unrealistic expectations of large immediate savings have spoiled many outsourcing engagements. It’s important to realize that there’s a delayed and compounded effect. A cautious, realistic set of expectations ensures continued support for your offshore strategy. You need a careful ROI analysis reflecting a conservative approach and timing of the benefits.
An ROI analysis can become a very complex calculation that brings together many variables and attempts to predict how those variables will interact with each other. In its simplest form, an ROI reflects how much a company must invest in total costs (including compounded interest), the timing of those investments, and the value and timing of all benefits that come from those investments over a fixed period of time. A greatly simplified ROI calculation would look like this: ROI = [Total Benefits] - [Total Costs].
3] Count the costs. Just as important as setting realistic expectations is that your expectations reflect all related costs. With so much pressure from senior management to cut costs by putting expensive skilled labor positions offshore, it’s easy to underestimate the true costs involved. These hidden costs add to those of the actual work:
- Selecting a vendor: expect this to take several people several months
- Transitioning work and business processes: knowledge transfer and loss, and process refinement
- Attrition of existing workforce: costs associated with removing existing staff
- Dealing with cultural differences: cultural training is obvious; 40 percent rework because you thought “no” meant “yes” is hard to estimate
- Ramping up: expect initial projects to be learning tools; don’t forget about organizational change management
- Having redundant management, infrastructure, and communications costs: initially, many more layers of management, servers and communications systems to purchase and install, and ongoing infrastructure maintenance costs
- Managing an offshore contract: the costs of maintaining a finished contract can be surprisingly high
Hidden costs can range from 15 to 60 percent of the outsourcing contract itself — sometimes more. You can minimize these costs with careful management and the right approach, but you must account for them in the total cost of an offshore outsourcing strategy before boasting of the savings to senior management.
As a practical matter, it’s best to centralize the majority of your overhead costs rather than to distribute them to individual project budgets. This approach provides a degree of insulation between the execution teams and the decision to embrace a certain business model. It encourages projects to take advantage of the benefits and cost-savings of reduced labor rates without burdening early adopters with an inordinate share of the startup costs. If you don’t allocate these overhead costs away from individual project efforts, few of the early pilot projects will be initiated based on the merits of their own performance, team moral can deteriorate when hard workers feel penalized by the decisions of senior management, and precious time and experience will be lost.
4] Understand and actively manage the risks. A successful offshore strategy is well informed and employs an aggressive risk-mitigation strategy. It’s not enough to simply keep a list of potential risks and be aware that things might go wrong along the way. Rather, you need to prioritize and aggressively manage your risks based on their expected impact. Keep up-to-date mitigation plans in place, actively monitor risk development, and take proactive measures to ensure that risks do not materialize. If risks do appear, act quickly to implement the mitigation strategy or fallback plan for that particular risk. Keep senior management engaged in risk management, and escalate issues early when you have the best opportunity for corrective action.
An aggressive risk-mitigation plan is thorough, well thought-out, and time-consuming to produce and manage, but it is well worth the investment when major risks are effectively managed. An aggressive risk-mitigation plan begins with a thoughtful strategy to identify risks. Fishbone diagrams work well within a brainstorming session that includes a wide cross-section of stakeholders, from senior management to front-line developers. After the risks are carefully defined, described, and categorized, their potential impact on the offshore strategy should be fully documented. Then, these risks should be carefully rated on a fixed scale in each of the following categories:
- Impact: How greatly can each particular risk affect the desired outcome of the strategy?
- Probability: How likely is each risk to materialize?
- Ability to control: To what extent can the risk be controlled if it materializes?
- Effectiveness: What is the team’s level of effectiveness in actually controlling the risk?
From these rating factors, a calculation will produce the amount of exposure that your offshore strategy has for each risk. This exposure value lets you prioritize the risks and give the most attention to mitigating the greatest risks. The final aspect of a risk-mitigation plan is a clearly defined course of action to prevent the risk from materializing, minimize its impact, and work within this context if it materializes.
Some risks, such as geopolitical instability and global economic conditions, are probably beyond your control. But the majority of the risks to a successful offshore outsourcing strategy — selecting the right vendor, negotiating a favorable contract, receiving high-quality deliverables, and controlling cost and schedule tolerances — are well within a company’s control through careful planning, management, and adoption of an aggressive risk-mitigation strategy.
5] Objectively measure and track the benefits. The corollary to counting costs is to objectively measure benefits. It’s tempting to inflate benefit claims or assign unrelated benefits to your offshore strategy, but don’t do it! Let the numbers speak for themselves. If benefits are short of expectations, you need to know that to take corrective action. If performance is extraordinary, don’t downplay those results, either.
If you separate overhead costs from regular project costs, it’s important to recombine those costs when you communicate the actual benefits. Some organizations prefer to level out the highs and lows in an offshore strategy and only communicate the mean results. Of course, the overall result is what contributes to the bottom line, but failing to recognize the highs and lows is a critical misstep. You need to be able to identify and maximize best practices while you take corrective action to optimize offshore benefits and limit liability for long-term results.
6] Use an effective outsourcing model. Another critical factor in executing an offshore outsourcing program is the use of an effective outsourcing model, one that has proven to be successful, meets your company’s business model, and fits your current circumstances. You can choose from a variety of outsourcing models, each with its own strengths, weaknesses, and appropriate applications. Offshore vendors may have a model they prefer to use and may tell you that this is the way to go. True, any single model may be the right one for some company, but it’s important to make sure the proposed model appropriately fits your company’s outsourcing needs and offers you the best opportunity to meet your high-level objectives and particular goals, rather than those of the vendor.
Models are as numerous, complex, and diverse as the companies and vendors that use them. An outsourcing model has many variables, such as scope, distribution of responsibility, contractual flexibility, and duration, but the main variables that define a model are the distribution of responsibility between the company and offshore vendor, and the scope of the outsourcing effort. The major outsourcing models are shown in “Primary Outsourcing Models,” below.
|Primary Outsourcing Models
• Staff augmentation: This model has the same characteristics as a traditional onshore staff-augmentation model. You hire contractors to perform a particular task or role, such as ABAP developer or Basis administrator. The contractor receives work assignments directly from your company, the same as all other developers on the team, and performs the work remotely. You drive this model and the scope of the work is limited. However, the staff-augmentation model has the advantage of having the lowest risk and being the easiest to implement as it can be executed with a single offshore resource for a fixed task and duration.
Typically, overhead costs more than offset the potential cost-savings of engaging a single offshore resource, but for purposes of assessing an offshore vendor’s capabilities or finding an immediate resource that can’t be acquired onshore, this is a safe starting point. As you add more resources and they remain engaged with your company, the overhead costs will be distributed and the model will be more cost-effective.
Offshore vendors tend to shy away from this model and many strongly discourage its use due to the shared overhead costs and limited upside for the vendor. However, depending on your company’s circumstances and overall objectives, it could be to your advantage to find an offshore vendor that willingly provides staff-augmentation services. If you are dedicated to an offshore outsourcing strategy but lack the process maturity that is required by other models, this may be the model that fits your company best.
As the scope of work and number of resources increase, the model moves toward either the project-outsourcing or the dedicated development center.
• Project-outsourcing: This model is a self-contained engagement with fixed start and end milestones where a dedicated offshore team is responsible for delivering a complete project according to your specifications. The model can vary depending on the distribution of responsibilities and the extent to which the vendor is responsible for defining requirements, designing the solution, developing code, testing, and implementing the system. Frequently, a company retains responsibility for business-requirements definition and design work, while the vendor produces technical specifications, code, and testing deliverables.
A small, well-defined, isolated, pilot project makes a good starting point to test the waters in a new offshore relationship. You learn the level of process maturity and overhead costs required to execute such a strategy successfully with a particular vendor, and the vendor learns how best to work with your company. If the project is small, the risk is relatively contained and both parties figure out the intricacies of an effective business relationship.
This model is more appealing to many offshore vendors and represents a more significant benefit for both your company and the vendor because the model can be scaled up to more and larger projects. However, this model also represents more risk, and the process-maturity entry point may be beyond the ability of some organizations to achieve. Careful management and a focus on process improvement can mitigate this risk. Most offshore vendors bring a level of process maturity you can leverage.
It’s important not to lose sight of your original objectives. It’s easy to get caught up in a process-improvement campaign, which may be successful in and of itself, but achieves none of your stated objectives and ultimately contributes to the failure of your offshore strategy by diverting your resources.
• Dedicated development center: This model has a pool of resources co-located at a vendor’s offshore site, resources that are dedicated to your company’s use. The arrangement can be specific to a particular development role (ABAP developers), or it can represent multiple functional areas and a combination of roles. Typically, you maintain a significant level of responsibility for managing the offshore resources. As your company matures in its relationship with an offshore vendor, this is a logical next step in growing from either a staff-augmentation model or a project-outsourcing model.
This model allows the same resources to be retained for multiple successive projects and reduces the loss of intellectual capital prevalent with the project-outsourcing model. It requires that you maintain a fixed level of staffing at the offshore development center, but it also has the potential to increase your benefits in a well-managed offshore relationship.
• Functional outsourcing: This model outsources an entire business function, process, application, or department. This tends to be a high-risk, high-reward endeavor. You must be confident in your vendor’s ability to deliver significant business value and minimize the risks of business disruption before entering into this kind of relationship. However, offshore vendors that specialize in a certain business functional area can often provide a higher level of expertise than you can — at a reduced cost.
This outsourcing arrangement truly represents the greatest value for a company that can take advantage of its benefits. But it also represents the greatest risk due to the potential impact on your company if outsourcing objectives are not realized. Unfortunately, few vendor relationships mature to where a company is comfortable outsourcing an entire business function.
7] Choose complementary business partners. Even more important than selecting an appropriate business model is choosing a complementary business partner to execute it. Many vendors have a predefined, new-customer initiation model and want to rush through an engagement’s preliminaries to get a signed contract without considering your high-level objectives and outsourcing goals. Resist this temptation by keeping your strategic objectives in focus and making those objectives central to your evaluation of a potential offshore business partner.
When evaluating offshore vendors, don’t skimp on the request for information (RFI)/request for proposal (RFP) process. Start by identifying all the vendors equipped to meet your technical and functional requirements. As you begin to filter through this initial list of candidates, send out an RFI stating your objectives and goals for establishing an offshore strategy and let the vendors take the initiative in proposing a solution to meet your needs. Evaluate their responses based on their ability, commitment, and approach to meeting your objectives.
Use the RFI process to construct a vendor compatibility scorecard to assess areas such as business philosophy, corporate values, corporate culture (how relationships are defined and decisions made), professionalism, customer focus, creativity, problem-solving ability, ability to execute, and integrity. If all the remaining candidates have similar industry experience and execution track records, the offshore vendor that is most focused on helping you solve your problems and can bring dependable problem-solving ability to the engagement will be your best long-term business partner.
After completing the RFI process and evaluating vendor compatibility, use the RFP process to solicit competitive bids on a structured pilot engagement from top offshore candidates.
Since SAP NetWeaver is a relatively new technology, and a new architectural platform for application development, judging the technical capabilities of various offshore vendors could be difficult. While strong expertise with older versions of SAP won’t necessarily be an indicator of proficiency with SAP NetWeaver, the functional knowledge and history of working with SAP products should not be overlooked. At the same time, companies should pay attention to a potential vendor’s experience with other skill sets, including Web development technologies such as Java, .Net, object-oriented design, and service-oriented architectures (SOA). Since each vendor will potentially demonstrate its experience with particular SAP NetWeaver implementations, you should place an emphasis on other compatibility factors — commitment to your company’s objectives and problem-solving ability.
8] Start slowly, build gradually. With little input from the teams managing execution of the offshore outsourcing strategy, senior management often decides how quickly to move forward. Ultimately, this decision should be determined by the rate of success of each successive project. Don’t fall into the trap of being compelled to achieve an enormous return on the first project. Start out by considering it a lost leader and the entry fee for access to future offshore outsourcing benefits. Take your time and make sure you establish a solid foundation for future executions. Begin small with a single, well-defined self-contained pilot project. A pilot minimizes your initial risks and allows both onshore and offshore teams to begin to acclimate to one another.
If an offshore outsourcing strategy is to be successful long-term, management at the highest levels of the company must demonstrate a tremendous commitment to the process from the very beginning. If executive commitment is less than enthusiastic, middle management’s commitment will be superficial, and the resolve to work through the bumps of a new business model, new business relationships, cultural differences, and competing interests (both internally and externally) will be absent from the start. As your company’s management and that of the vendor work together and demonstrate a mutual commitment to success, you will establish relationships and gain the experience that allows an offshore strategy to grow organically within your organization.
9] Monitor and evaluate your progress. As a company begins to execute an offshore engagement, it’s important to keep track of meaningful measurements to understand the relative success or failure of your overall offshore strategy, as well as particular parts of it. To do this, you must begin with an established baseline of current performance using the same scorecard metrics that you will use to evaluate offshore performance. Choose metrics that measure the specific goals and objectives of your outsourcing program, and define them in terms of who is to measure them, when to measure them, how and when to report them, and how to audit them. Before signing a service-level agreement (SLA) or Statement of Work, make sure that the metrics are clearly stated in the contracts and that all parties agree to them.
Useful metrics are notoriously difficult to define and interpret. Lines-of-code statistics can vary dramatically depending on the programming language used and the coding habits of individual developers. Function points can be too vaguely defined to be meaningful. Statistical purists certainly have to compromise to define reasonable (and cost-effective) performance metrics. Regardless of the productivity measures used, you need to measure performance based on total cost (baseline estimates vs. offshore actuals), efficiency (productive output per labor hour, productive output per dollar, productive output per time period), quality (defects per productive output unit), customer satisfaction (number of customer-support calls, amount of rework), and team morale.
Avoid using high-level metrics such as cost per consultant hour or onshore/offshore staffing ratios. Although these numbers may look impressive, they seldom contribute to a meaningful evaluation of how well the offshore outsourcing objectives and specific goals were met. Ultimately, performance metrics need to answer the question, “Is work being done faster, cheaper, and better than it was before initiating the outsourcing strategy?” If the answer is no, the metrics need to provide enough information to point management in the right direction to correct the problem.
10] Keep it personal. Although the advice to maintain a degree of separation between onshore and offshore resource teams may seem reasonable, it will result in suboptimal performance for both groups. The most important aspect of achieving offshore outsourcing success with a particular vendor is to keep the relationship personal. In a process-intensive activity, such as offshore outsourcing, it’s easy to lose sight of the personal aspects of offshore engagements. While processes are useful to constrain risks and ensure consistency in performance, ultimately it is the people that make an engagement successful or not.
The greater the extent to which personal relationships are fostered among onshore and offshore team members, as well as project and executive management, the more chance you have for success. Any personal weaknesses on the team can be addressed and compensated for only if they are identified. A process might identify such a problem, but people working together are much more aware of the relative strengths and weaknesses that relate to performance. When engagements face difficult times, as they all do, it’s unlikely that teams will dig deep, make personal sacrifices, and find additional motivation out of loyalty to a process. But personal relationships, built upon mutual trust and respect, warrant that kind of loyalty, especially when all parties are personally committed to the same end goals.
The Big Picture
While there are obstacles and difficulties, costs and risks involved with pursuing an offshore outsourcing strategy, the potential benefits far outweigh the risks for many companies. Understanding the obstacles of offshore outsourcing provides the roadmap to success. Success is not only within reach for many companies not currently taking advantage of the benefits of outsourcing, but success rates are high for companies that have followed the guidelines given here.
Even if large-scale offshore outsourcing is not an option that you’re ready to consider, targeted outsourcing can provide an effective supplement to your existing solution toolset and broaden its capabilities to meet a variety of demands within an increasingly global business environment. The benefits of offshore outsourcing are not as elusive as they once seemed; you can do it successfully.
|David Bromlow is founder and managing partner of Quivira, an SAP outsourcing services company based in St. Louis, Missouri. He has extensive experience in IT project management, offshore outsourcing, and technical leadership focused on SAP NetWeaver technologies. Bromlow’s background includes several years in corporate IT management on the customer side of outsourcing relationships.